Technological Change as Reflected in Hotel Property Prices

Abstract

This paper investigates the effects of age on the sale prices of hotel real estate. Value erosion of commercial property due to the passage of time may be offset by renovation, although substantial follow-on investment usually occurs several years following construction. Obsolescence produces value losses during the post-construction period prior to new investment that result from technological change [Colwell and Ramsland 2003]. A hedonic model is specified to allow age to measure the effects of obsolescence in hotel prices. Although the long-run obsolescence rate for hotel properties of 1.93 percent per year aligns closely with the rate estimates elsewhere for retail properties, the path of obsolescence through time shows some marked departures. Contrary to the theory and the empricial results from the retail real estate market, hotel prices do not reveal much more obsolescence in the years immediately following construction than later. Also, the age and sale price relation turns positive nearing the third decade of the lives of hotels indicating a vintage effect. Thus, a V-shaped obsolescence function emerges that either may be explained by a fixed-cost renovation expenditure function or a vintage effect produced by the demand for surviving assets. A series of tests of hotel brand-specific obsolescence rates reveals considerable variation in these rates of among seasoned properties, perhaps an indication of a convex renovation expenditure function and sequential follow-on investment.

Keywords: technological change, hotel prices, functional obsolescence, property depreciation